Silver Hits One Month Low On Fed Statements - What's Next?

Monday, May 23, 2016

Precious metals have been riding a roller coaster pretty much all year. However, at the end of the day, the trend has still been an upward one. Since mid-last week, we've seen heavy declines on silver, gold, platinum, and more! The declines are the result of expectations associated with the Federal Reserve and its interest rates. Today, we'll talk about why the Federal Reserve's interest rate is so important to precious metal investors, the news that hit last week that has caused declines, and what we can expect to see from the price of silver moving forward.

Why Federal Reserve Rates Are Being Watched By Precious Metals Investors

At first glance, it may seem like the Federal Reserve's interest rate and precious metal values are two completely different topics. However, the two are actually very much related. It all has to do with how silver is priced, well, how most commodities are priced for that matter. The reality is that silver, like most commodities, is priced using the United States dollar, and the Federal Reserve is ultimately in control of the currency.

You see, if the Federal Reserve increases its interest rate, it will ultimately be increasing the value of the USD. In this case, silver would become more expensive outside of the United States as the result of a higher currency-exchange rate. As a result, global demand for silver would decline, leading to declines in the value of the precious metal.

News That Came Out Last Week

The Federal Reserve has been planning on increasing its interest rate multiple times in the year 2016. However, a mix of poor global economic conditions and concerning economic conditions in the United States has stopped the Fed's plans - so far! However, last week, an important piece of data was released, and it supports the idea of a rate hike. Last week, the consumer price index for the month of April was released. In the month, prices for consumer goods in the United States increased by 0.4%. While this may seem like a relatively small number, when we're talking about inflation, that's huge. In fact, it was the best month the United States has seen in around 3 years.

While positive economic conditions are always a good thing, in the case of silver, this news will generally cause declines, especially considering the Federal Reserve's plans! Because of the positive economic data out of the United States, the Federal Reserve may have what it needs in order to increase its interest rate. As mentioned above, that would be a bad thing for silver investors.

What We Can Expect To See Moving Forward

Moving forward, I have a relatively mixed opinion when it comes to what we can expect to see from the price of silver. In the short term, and possibly for a month or two, we can expect to see further declines. As concerns with regard to the Federal Reserve's interest rate hike continue, declines will likely continue. Also, if the Federal Reserve does increase its interest rate, we can expect to see declines in silver following the news. On the other hand, if the Fed doesn't increase interest rates in June, we're likely to see gains in the value of the precious metal. Nonetheless, this is all short term. In the long run, I'm expecting to see gains regardless. The reality is that, while the United States economy may be picking back up, the gains won't last past an interest rate hike. Not to mention, silver is a safe haven investment, and an interest-rate increase is bad for the market. So, demand from safe haven investors would likely outweigh currency concerns in the long run. 

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.